ACT 3151

TAXATION 1
 INTRODUCTION TO TAX LAW
• WHAT IS TAX??
• THE CHARACTERISTICS OF TAX
• IMPORTANCE OF TAX
• OBJECTIVES AND CONTRIBUTIONS OF TAX
• TYPES OF TAXES
• SOURCES OF REVENUE LAW
• CHARGING SECTION AND SCOPE PF CHARGE
 DEFINITION: WHAT IS TAX
• ‘contribution levied on persons, property or
business for the support of government’ – Oxford
Dictionary
• ‘a compulsory exaction of money by a public
authorities for public purposes enforceable by law’
– Matthews vs. The Chicory Marketing Board
(1938)
• ‘the process of rising money for the purposes of
government by means of contributions from
individual persons’ – R vs. Barger (1908)
 Characteristics of a tax

• It is compulsory payment
• The money is raised for government purposes
• The exactions do not constitute payment for
services rendered
• The payments are not penalties
• The exactions are not arbitrary/random
 HISTORICAL BACKGROUND
• 1.1.1948- Income Tax Ordinance, 1947
– Introduced by the British Govt. into the Federation of
Malaya
– Based on Model Colonial Territories Income Tax
Ordinance,1922 which was designed for the British Colonies
• 1.1.1968- INCOME TAX ACT 1967
– replacing Income Tax Ordinance 1947,
– consolidated of 3 laws of Income Taxation :
• (Income Tax Ordinance 1947,
• Sabah Income Tax Ordinance 1956,
• Sarawak Inland Revenue Ordinance 1960.
 HISTORICAL BACKGROUND
• Addition to income tax;
– 1967- Supplementary ITA 1967 (including development
and timber profit tax)
– 1967- Petroleum (Income Tax) Act 1967.
– 1968- Investment Incentives Act 1968
– 1986- Promotion of Investment Act 1986
– Land Speculation Tax Act 1974
– Real Property Gain Tax Act 1976
– Share (Land Based Co.) Transfer Tax Act 1984
 Other Tax besides Income Tax

• 1991- Stamp Act 1949; comprising of

– Stamp Ordinance 1949
– Stamp Ordinance 1952 (Sabah)
– Stamp Ordinance 1933 (Sarawak)
• Customs Act, 1967
• Sales Tax Act, 1972
• Service Tax Act, 1975
• Excise Act, 1976
 TYPE & CLASSIFICATION
OF TAX
DIRECT INDIRECT
• Tax paid directly by • Tax generally
those on whom it is collected via third
levied, consist of : party.
– Income tax-individual • Sales taxes,
tax , company tax • service tax,
– Real property gain tax • excise duty,
– Stamp duty
• export duty,
• import duty.
– Petroleum tax
 CONTRIBUTION TO THE
ECONOMY
• method for Government obtain revenue
• budget its annual expenditure
• Direct tax: major source of government revenue
 OBJECTIVES OF TAX POLICIES

• Revenue purposes
• Effectively collected, minimum cost
• Regulate private sector
• Encourage undesirable activities
• Distribute income & wealth
• Fairness & equity
• Continue Govt. in power
 Burden of taxation
• PROGRESSIVE TAX
– Takes an increasing proportion of income as income
rises
– Burden of tax is heavier on higher income earners
– e.g- individual income tax
• PROPORTIONAL TAX
– Takes the same proportion of income at all level
– Persons pay flat rate of tax
– e.g-company tax
 Burden of taxation
• REGRESSIVE
– Takes a decreasing proportion of income as
income rises.
– Impact of tax is greatest on lower income-earners.
 Burden of taxation
For Indirect tax
• AD VALOREM
– Tax is based on value, fixed % of transaction value is
absorbed as taxation.
– e.g-sales tax (, 5%, 10% or 15% imposed on different
categories of goods)
• SPECIFIC RATE
– Specific monetary amount levied on each unit.
– e.g-import duty (RM100 tax on certain goods)
 SOURCES OF TAX REVENUE LAW

• Formal sources of law

– Statute Law / legislation- law that enacted by
Parliament, e.g-ITA 1967
– Case law / un-enacted law-law that created by the
decision of the courts
• Informal sources of law
– The Practice of the IRB
• The day-to-day practice (formal/informal)
• Ruling/guidelines issued by the IRB
BASIS OF MALAYSIA
INCOME TAX
 Scope of Charge to Income Tax
• Refers to the limit or parameters within which
income would be taxable in a country
• Categories:
i. Territorial or derived basis/scope
ii. World income scope
iii. Derived and remittance basis/scope
• Scope of Charge to Income Tax in
Malaysia?
 1. The territorial or derived basis
• All income that arises within a particular territory or
country would be taxable.
• Income arises outside the border is not subject to tax;
and
• Any income arising overseas and brought back into
the country would also be free of tax.
• Example; Hong Kong
• Resident status and citizenship status is irrelevant
• issue;-> e-commerce income????
 2. The world income basis
• All income (wherever arising) is taxable.
• The question of remitting income into a country is not
relevant.
• The scope of charge is based on the citizenship and residence
status of a taxpayer.
• Resident company in specialized industry will be taxed under
world income basis
• Requires more resources in term of manpower of tax
authorities to ensure taxpayer report their worldwide income.
• Example: USA, JAPAN, AUSTRALIA, NZ
• Issue -> double taxation
– Must have double taxation agreement
 3. The ‘derived and remittance’ basis

• Income arising in particular country would be

taxable (as in derived basis)
• Income brought into the country from overseas
would be taxable.
 CHARGING SECTION
• SEC. 3 ITA 1967;
– “Subject to and in accordance with this act , a tax
to be known as income tax shall be charged for
each year assessment (Y/A) upon the income of
any person accruing in or derived from Malaysia
or received in Malaysia from outside Malaysia”.
 SOURCES OF INCOME
• SEC. 4, ITA 1967;
a) Gain or profit (income) from a business;
b) Gain or profit (income) from employment;
c) Dividends, interest or discounts;
d) Rents, royalties or premiums;
e) Pensions, annuities or other periodical payments not
falling under any of the foregoing paragraphs;
f) Gain or profits not falling under any of the
foregoing paragraphs;
 Income Vs. Capital Gain
• Income:- taxable
• Capital gain :- not chargeable to income tax
• How to distinguish between income and
capital?
• What are the characteristic of the two?
– Court case: Mamor Sdn Bhd vs. Director General
of IRB
 Scope of charge for Malaysia
• Resident
– Derived and remmitence basis, which is derived from
Malaysia and received in Malaysia from outside Malaysia
(foreign source of income received in Malaysia)
– With the effect of Y/A 2004, scope of charge is Territorial
or derived basis
– foreign source income received by ‘any person’ in
Malaysia will be exempted from income tax, except for
company carrying on business of banking, insurance,
shipping and air transport.
• Non-resident
– Territorial or derived basis
 DEFINITION OF ‘PERSON’.
• SEC. 2, ITA 1967;
– Person include;
• A company,
• A body of person
• A corporation sole
• A body of person;
– Unincorporated body of person ;
• individual person;
• Trust body; Club;
• Executor ;
• Co-operative society
 The importance of the concept of
‘person’.
• Tax is charged on his income derived from
such taxable activities
– The taxable activities were different for different
categories of person
• Tax rate is different for different categories of
person
– Flat rate or
– Scaled rates or
– Reduced rates
Tax Rates: Income Tax Rates for Resident Individuals
Chargeable Income   Y/A 2018 to 2019 Tax Payable (RM)
    Tax Rates (%)
On the first 5,000   0
On the next 5,000 1% 50
On the first 10,000   50
On the next 10,000 1% 100
On the first 20,000   150
On the next 15,000 3% 450
On the first 35,000   600
On the next 15,000 8% 1,200
On the first 50,000   1,800
On the next 20,000 14% 2,800
On the first 70,000   4,600
On the next 30,000 21% 6,300
On the first 100,000   10,900
On the next 150,000 24% 36,000
On the first 250,000   46,900
On the next 150,000 24.5% 36,750
On the first 400,000   83,650
On the Next 200,000 25% 50,000
On the first 600,000   133,650
On the next 400,000 26% 104,000
237,650
Exceeding 1,000,000 28%  
 Example (w.e.f YA 2019)
• Company
– Paid-up capital < RM2.5 million
• Chargeable income <RM500,000 - 17%
• Excess - 24%
– Other companies (resident, non resident, trust and
business trust
• YA 1998-2006 - 28%
• YA 2007 - 27%
• YA 2008 - 26%
• YA 2009-2015 - 25%
• YA 2016-2019 - 24%
 Example
• Individual;
– Tax resident - 0-26% (scaled rate)
– Non-tax resident - 26%
• Trust body - 26%
• Club, trade association - 0-26% (scaled rate, same as
individual’s scaled rate)
• Co-operative society - 0-25% (scaled rate, different from
individual’s scaled rate)
• Limited Liability Partnership
– Paid-up capital < RM2.5 million
• Chargeable income <RM500,000 - 20%
• Excess - 25%
End of topic 1